Revenue Procedure 2020-17 Explained – Forms 3520 & 3520A
On 3rd March 2020, the Internal Revenue Service (IRS) issued Revenue Procedure 2020-17 (Rev Proc), which specifically covered an exemption from information reporting in respect of certain non-US retirement plans.
To provide some context, US persons with an interest in a non-US “trust-based” retirement plan should consider filing Forms 3520-A and 3520 annually in respect of such plans. This can be onerous for the US person, however, failure to file such forms when necessary, carries significant penalties.
At USTAXFS, IRS Form 3520-A/3520 reporting is commonly carried out for US persons with a UK Self-Invested Personal Pension (SIPP) plan. An exemption to these onerous reporting requirements was welcomed news, and there was much hope this would be the case regarding reporting on SIPPs.
However, the “devil is in the detail”.
As we review the detailed requirements set forth in the IRS Procedure, it is clear that the likelihood is that very few SIPPs will qualify for the exemption without further clarification from the IRS.
Below is an outline of the main points (and our comments) to be met for the exemption to apply:
- The trust/plan must operate exclusively or almost exclusively to provide a pension or retirement benefit under the laws of the trust’s jurisdiction.
USTAXFS: Reasonable and fits with the majority of the UK pension schemes
- The trust is generally exempt from income tax under the laws of the trust’s jurisdiction.
USTAXFS: Reasonable and in line with the pension growth being tax-exempt in a UK pension plan
- Annual information reporting with respect to the trust is provided (or is otherwise available) to the relevant tax authorities in the trust’s jurisdiction.
USTAXFS: We now begin to ask questions, what reporting does a UK pension plan carry out annually? If any reports are being made, do these satisfy the IRS standard of reporting? What is specifically meant by “or is otherwise available”?
- Only contributions with respect to income earned from the performance of personal services are permitted.
USTAXFS: As you could guess, more questions. Does a personal contribution of a nominal amount taint the whole fund and ability to be exempt from reporting? Can we assume the contribution was made from net earnings? How do we track historic contributions to identify contributions were all in connection to personal services.
- Contributions must be limited to a percentage of earned income of the participant, and are subject to an annual $50,000 limit or lifetime $1,000,000 limit.
USTAXFS: On the face of it, it’s a pretty clear point, except for understanding whether historic “annual” contributions come into play. For UK SIPPs with historic substantial annual allowances and the ability to carry forward unused allowances, whether this criterion can be met is uncertain.
There are several other details that we believe need further clarification.
As the IRS procedure is currently written, relief from filing Forms 3520-A and 3520 is not clearly provided for UK SIPP participants.
We suspect similar issues exist with respect to similar plans in other countries.
Revenue Procedure 2020-17 is definitely good news, as it shows an awareness within the IRS of the burdensome filing requirements that exist for US taxpayers throughout the world.
USTAXFS will look to push back to the IRS for clarity in the hope that in the not too distant future this burdensome reporting will not apply to UK SIPPs.
If you have any questions or concerns with respect to the reporting of your non-US pension plan, please get in touch.